Understanding Key Financial Terms

Every small business owner knows how critical it is to keep a close eye on business finances. Effectively managing your business finances involves regular planning, monitoring and control—allowing you to build a successful business, stay on top of all income and expenditures, and take action to address any issues before they get out of hand.

In order to maintain a successful business and properly control your finances, you should know basic accounting elements and understand how they can impact the bottom line.

Each business finance category below contains the terms you are most likely to encounter. A summary explanation of what each term means is provided but we encourage you to consult your accountant if you have any questions.

Fund Raising Terms

Balloon Payment – when you take out a loan you agree to make loan repayments of a certain amount. Some loans have a set repayment figure for an agreed period and then a large one-off final payment (a balloon payment). Balloon payments are common on loans taken out to purchase company vehicles where the owner often has the choice of either making the large final payment or returning the vehicle to the loan company.

Business Plan – a plan that details your business ideas, goals and strategies and how they will be achieved. This is a key tool in persuading lenders to extend a loan.

Capital – the total amount tied up in the fixed and current assets of the business.

Capital Expenditure – expenditure on fixed assets for the business.

Collateral – property put forward by the borrower which the lender will take if the loan is not repaid.

Credit Rating – a business' financial history relating to repayment of past loans or debts.

Guarantee – a third party guarantee to pay your loan if you default on repayments.

Investor – a funding source that shares in the profit or loss of your business, based on the percentage owned. Unlike lenders, investors have potential for either greater reward or greater loss based on the success of your business.

Line of Credit – money on loan over a period of time held as a reserve to be used as required.

Share Capital – funds raised by the company in return for shares issued.

Venture Capital – funds used to buy an equity share in a business, which demonstrates that it has a good potential for above average growth.

Working Capital – funds needed by a business to meet day-to-day operating expenses. Start-up funding may need to include an amount for working capital to cover the period of time prior to income being generated from sales.

Day to Day Operational Terms

Accounts Payable – money owed by your business to its creditors.

Accounts Receivable – money owed to your business by its debtors.

Asset – something of value owned by the business. An asset can be fixed, current or liquid.

Balance Sheet – a financial snapshot taken at a particular time, which displays business assets and liabilities and calculates business equity (the approximate value that remains in the event of liquidation).

Budgets/Budgeting – an estimated financial business plan for a given period of time. A budget summarizes projected income and expenditures and should be monitored and revisited monthly.

Cash Flow – movement of cash into or out of your business. It is important to control cash flow to ensure that funds are kept within agreed limits.

Credit – time allowed for customers to pay for goods or services supplied to them.

Creditor – a supplier who provides products or services to the business not yet been paid for.

Current Assets – assets which are expected to be converted into cash within one year.

Debtor – a customer who has received products or services and has not yet paid for them.

Depreciation – the amount by which the value of items such as equipment, cars, property etc, decreases due to wear and tear and the passage of time.

Direct Costs – see Variable Costs.

Factoring – a process whereby a business assigns money owed by customers to an outside vendor who immediately pays a percentage of the invoice value and a further percentage when the customer pays the bill. The factoring company takes a percentage of the overall debts for providing its service.

Fixed Assets – assets that are retained and used in the business on a long-term basis.

Fixed Costs – overheads which remain the same regardless of the amount of goods sold or produced, for example rent or administrative staff salaries.

Gross Profit or Loss – sales minus Direct Costs

Indirect Costs – see Overheads.

Liquid Assets – cash or assets which can be quickly and easily converted to cash.

Net Profit or Loss – the surplus or deficit after all operating expenses and investment items such as interest (paid or received) and income taxes have been taken into account.

Operating Expenses – business expenses associated with day-to-day operations, excluding investment costs such as interest and income taxes.

Operating Profit or Loss – the profit or loss generated by the business after operating expenses have been deducted but before any tax, interest (paid or received) and extraordinary costs have been taken into account.

Overheads – also known as indirect costs, these are operating expenses not directly related to the production of goods or services.

Projection – the anticipated financial performance of the business over a period of time including cash flow, liabilities and profitability.

Variable Costs – also known as Direct Costs (the cost of earning a sale), these will vary depending on the amount of goods sold or produced. Variable costs include the cost of inventory and, for a manufacturing business, the cost of producing an item for sale including raw materials, factory costs, manufacturing wages and depreciation of the manufacturing plant.

Other Common Accounting Terms:

Accounting Period – the period for which you are reporting, typically used for financial statement preparation purposes. Typical accounting periods are months, quarters, or years.

Audit – the process undertaken by your accountant/auditor to check and verify your books and records. Part of this process includes checking that your internal accounting procedures are applied consistently and follow legal requirements.

Auditors – the individual or team of accountants who audit your records.

Why Sage 50 Accounting?

Sage knows Canada

At Sage, the source of our inspiration and innovation for Sage 50 (formerly known as Simply Accounting) never changes. Our mission is always driven by the energy and creativity of Canadian business owners pursuing their dreams. Helping them reach their goals is what we do.